FSA warns FSCS may not cover some structured product losses

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by Drazen Jorgic on Feb 28, 2011 at 11:50

FSA warns FSCS may not cover some structured product losses

The Financial Services Authority (FSA) has issued a warning about the way some retail structured products, namely structured deposits, are set up.

The FSA warned that marketing and promotion of structured investments needed to be clearer but it also sounded alarm bells around structured deposits, where it said some clients could find themselves not being covered by the Financial Services Compensation Schemes because of the way they were created.

In a paper, titled The Retail Conduct Risk Outlook (RCRO), the FSA warns that some structured products are difficult to understand for customers. In particular, understanding 'whether the product offers full or partial capital protection and the circumstances in which that protection does or does not operate, can be hard for consumers to understand.'

'There is also the possibility that the cost of the product could outweigh the benefits, and that a consumer could be better served by a different product. Therefore, the quality of the design, marketing and distribution of structured investments is critically important.'

The RCRO paper pointed out that a previous FSA investigation found that marketing literature and advice provided in the sale of Lehman-backed structured investment products found a number of failures. Therefore it added: 'Financial promotions for structured investment products should be fair, clear
and not misleading.'

Structured deposits

In its study of structured deposits, the FSA said it was important that firms ensure any statements about compensation arrangements in their financial promotions for structured deposits are accurate.

'We have identified a number of instances in which individual structured deposit customers would not have been covered by the FSCS in the event of a default by the deposit-taking firm because of the way in which the deposit was set up.

'Although some structured deposits are very simple, we have seen examples of others that were either inherently complicated or described in a way that made them appear so.'

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2 comments so far. Why not have your say?

Great! So what happens next? FSA investigated the sale of these products a few years ago, variously known as SCARPS and 'precipice bonds' at the time, IFAs and FSCS paid compensation to investors who lost money due to mis-representation. Then in 2009, FSA investigated and found failures in the marketing literature and advice provided in the sale of Lehman-backed structured investment products (SCARPS) in 2009. Same products, same product provider in many cases, and again investors were misled about the risks. FSCS doesn't want to know, and 2000 savers with plans from NDFA, DRL and ARC are still pushing the case for compensation. Meanwhile, the same product provider continues in a different guise, providing 'white label' structured products for high street names. What power does the FSA actually have?

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White Stick follower

Mar 01, 2011 at 13:15

So what does fair, clear and not misleading mean? Well when FSCS wanted money from Abbey and took it to court, FSCS claimed as part of its complaint that Plan at issue included the omission of certain details which meant that the Plan was "not fair,clear and misleading".

Yet, when FSCS faces paying out money, it claims that omission of important details in another Plan, from the same source, does not constitute "fair, clear and misleading".

It also, incredibly said that FSCS does not expect investors to read the small print, if the Plan is titled 'Secure', but it does expect investors to read the small print, including the invisible omitted matter,when the boldy stated and specified 'At Risk' risks turn out to be not the real risk at all, because there were others not disclosed.

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